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Monday 7th February 2022
Hi Friend,
TSE Monday Morning Markets ...
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| | The Saturday Economist Monday Morning Markets ...
This is our Monday Morning Markets Update for the 7th of February 2022. Equity markets slipped lower last week. Markets are grappling with the reality of leaving Planet ZIRP.
Central bankers are calling time. UK rates are on the rise. The Fed will move in March. Bond yields moved higher. US ten year yields closed at 1.90%. Once the Fed stops buying, ten year rates will really rise. Soon the move to 2.00 in the U.S. and 1.50 in the UK.
Over over valuation index hit 4.5% in the week. A 10% adjustment in the US a possibility. A 15% adjustment the requirement in tech. Markets were spooked by the 25% drop in Facebook. In payment, PayPal and Square were on the block. Old timers, Visa and MasterCard, masters of cash. Berkshire Hathaway back in fashion. Cathie Wood stuck in the Ark. Bitcoin back over $40,000, strange markets.
Top line, "Cash is Trash, (Jamie Dimon), Bonds are Garbage ( Bill Gross), Equities Are Overvalued (Everyman), Bitcoin is worthless (Jamie Dimon), Most NFTs are junk (John Hargrave)" ... When it comes to understanding market moves, "Any explanation is better than none" (Nietzsche). Be careful out there ...
"To understand the markets, you have to understand the economics".
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| | Markets down 1.8%. Overvaluation 4.5% ...
Our global equity index basket closed down 1.8% this week. US stocks may have held the headlines but Asian stocks led the way, down 4%. Hang Seng the most volatile down almost 6%.
In Europe, the DAX and CAC were lower by 1.5%. The FTSE steady in the group. Excitement in the US as Facebook, Paypal and Snap crashed by 25%. By the end of the week, U.S. markets closed lower from mid week highs.
Our overvaluation rating closed at 4.5%. A near 10% correction would be required to return US markets to fair value. 3.5% the correction required in Europe, China and Hong Kong, offer best value. No real concerns about a "Super Bubble" setback. Trade "Dynasties for Empires" the play.
Easy money over the past year, now more difficult to find. Markets are adjusting to rising base rates and bond yields. Central bankers are raising discount rates. Slower growth in prospect, not a great cocktail for equity prices.
We signed up to Jim Cramer's investment club. Bit more chart work would avoid some early buys. The club picked up PayPal in January, made for interesting video clip.
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| | Bond Market Sentinel ... US Ten Year Yield 1.90 ...
US ten year bond yields closed up 11 basis points in the week at 1.90. Tapering set to terminate in March this year. We expect bond yields to test the 2.00 level 'ere too long. 1.80 was blown away this week.
UK ten year gilts closed up 13 basis points to close at 1.39. Trading at 1.41 this morning. The Bank of England is expected to raise rates by a further 25 basis points in March. We expect ten year gilt rates to hit 1.50 by Easter.
In Japan rates moved higher. In Europe, composite rates moved into positive territory. An end to negative rates. Inflation in the Eurozone hit 5.1% in January. Even Lagarde now admits ECB base rates may rise before the end of the year.
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| | Exchange Rates ... Sterling up $1.36 ...
Sterling closed up against the dollar at $1.36 but down against the Euro at €1.19. The Euro held against the Dollar at $1.13.
The Fed will move on rates in March, Some now expect a 50 basis point rise to end the party. The Greenback trades at $1.35 this morning.
We expect Sterling to average £1.35 through the year. Against the Euro we model €1.18 with a slight uplift in the Euro Dollar rate to $1.15. This on the assumption the ECB will yield to peer group pressure and begin to raise rates towards the end of the year.
["One of the nice things about being a currency forecaster, is that expectations of you are very low. Moderate success is a great surprise". Professor Avinash Persaud].
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| | Empires of the Cloud up 0.8% ...
Our Empires of the Cloud Fund was up 0.8% this week. Apple and Google the star performers on strong results. The markets looked cautiously at Apple and Microsoft.
All eyes were on Facebook. The shares crashed down 25% on Wednesday. PayPal had made the measure down 25% the day before. Snap was down 23%.
The shorts tested Amazon, down almost 10% as Meta was mauled. Amazon pulled through, up almost 10% in the week. Jim Cramer championed the growth at AWS and more.
Our valuation index suggests an 16% over reach. A combined market cap of $9.2 trillion and an average PE of 30.5 suggests a period of consolidation should follow at best. Further short term weakness probable as markets adjust to higher rates in March.
Analysts remain bullish on the empires of the cloud fund. The bulls anticipate a 15% - 30% gain for the fund over the next twelve months. Super bulls foresee a 40% gain. Really? What's not to like? Amazon trades with a PE of 49.
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| | Dynasties in the Cloud up 5.3% ...
In China we track, our "Dynasties of the Cloud" fund. We follow the fortunes of Alibaba, Baidu, Tencent, Weibo and Xiaomi. The fund was up by 5.3% in the week. Baidu and Tencent offer best value.
Baidu the leader up 8%. Xiaomi the laggard up just 2%. The downsides appear limited. Strong rallies a real possibility.
We consider the fund to be oversold into 2022. Gains in the year ahead are expected to out perform with little downside. 10% the low level gain, 44% gain the average expectation. The high term upside is now 78% but you may have to wait a bit!
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| | Crypto Wallet up 7.7% ... Our Crypto Wallet was up 7.7% this week. Bitcoin rallied to $41,235 from $37,87. All moved higher, with Dogecoin the laggard up just 4%.
Bitcoin trades at $42,200 this morning.So much for $38,000 resistance to any upside move. The Big Apes made a late move on Friday to push through $38k and climb back above the $40,000 dollar ledge.
It looks like a "thin rally". Last chance to buy above £40k the bears suggest. The charts look ominous for Crypto.
Our crypto wallet, the "Traders Dream Pack", always promised to be an investors nightmare.
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| | Oil Brent Crude higher ... $93.27 ...
Oil
prices Brent Crude closed up at $93.27 last week, trading at $92.30 this morning. US storms pushed prices higher. Ukraine storms
developed $90 dollars as the floor.
Talk of $100 dollar oil. The traders may seek to test the higher level. That looks like hard work. Fundamentals will rule to push prices lower. The US oil rig count is back at 500. Should be 900 at this price.
$80.00 may be the range over the first quarter. $75- $80 Brent Crude through 2022 is our benchmark call. Tad optimistic? Perhaps.
"Volatility remains in market demand, exacerbated by geopolitical supply side complications." Yep we really do say that! Prices above $90 won't help the inflation challenge..
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| | That's all for this week's Monday Morning Markets, have a great week ahead.
John
To understand the markets, you have to understand the economics
Friday Forward Guidance, The Saturday Economist, Monday Morning Markets. Forward to a Friend or Colleague. They can sign up for updates here.
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© 2022 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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